No stagflation as in the 1970's, said Bernank
The chairman of the Federal Reserve Ben Bernanke believes that the United States will avoid the "stagflation" as in the 1970's, while acknowledging that inflation could complicate efforts by the central bank to support the economy.
"I anticipate no stagflation," said Bernanke, in front of the Banking Commission of the United States Senate, about the situation at a time marked by sluggish economic activity and a sharp rise in prices.
"I repeat, we need to monitor it very carefully, but I do not think that we are in any way similar to the situation of 70 years. I expect that inflation is falling," he added.
The skipper of the Fed felt that the bulk of inflationary pressures was due to the rising price of energy and food.
"The current inflation is due primarily to raw material prices of oil and energy and other prices that are determined on world markets. I think that these prices should stabilize, or at least not to continue to rise at the pace that we have experienced recently, "he explained.
"If so, then inflation is expected to decline, and we should therefore be able to respond to what is both a slowdown in growth and a significant problem in the financial markets," said Bernanke .
However, he admitted that the US central bank was in a more difficult position today to respond to the economic slowdown than it was in 2001.
"At this stage, we really inflationary stronger than in 2001," said Bernanke, in response to questions after his speech.
"I think it is fair to say that both fiscal policy that monetary policy face additional constraints," he added.
The US central bank has lowered the level of its key interest rate by 2.25 percentage points since mid-September last year, to bring it back to 3%, to support a flagging economy and the threat of a recession.
The highest levels and unexpected consumer price and wholesale, however, have raised fears in some economists that the Fed goes too far to support growth, thus leading to higher inflation.
SMALL BANKS THREATENED
Bernanke reiterated Thursday, as the day before the Committee on Financial Services of the House of Representatives, that the Fed would act in an appropriate manner to prevent any further deterioration of the American economy.
"It is essential to recognize that the risks to growth are still there," he insisted.
"The Fed will continue to measure very precisely any information which would weigh on the economic outlook and act in a timely manner to support growth and provide safeguards against downside risks," he continued.
Bernanke stressed that in the case of the current downturn, it was the consumer who would bear the brunt of the impact, in particular because of the fall in residential property prices.
"In fact, the effects of the decline in the stock market have focussed on the investment," said Bernanke about the slowdown in 2001.
"In the present case, consumers bear the greatest consequences," he said.
The skipper of the Fed has held further that the decline in residential property prices were also a potential source of inflation because of their "perverse effect" that raises the price of locations, people are less inclined to buy housing and preferring to rent.
Bernanke also found that some small American banks could disappear because of the crisis, but that the banking system remained strong as a whole.
"I expect that there will be some failures," he said, alluding to the regional banks, which have invested heavily in real estate.
"Among the largest banks, solvency ratios remain good and I does not anticipate a serious problem of this kind among major banks active in international markets, which constitute a large part of our banking system," said Bernanke .
He felt that the legislature and the players in the real estate sector should go beyond temporary solutions to the crisis mortgages at risk (subprime) to find long-term solutions.
With Alister Bull, Joanne Morrison and Emily Kaiser, French and Danielle Rouquié Stanislas Dembinski
"I anticipate no stagflation," said Bernanke, in front of the Banking Commission of the United States Senate, about the situation at a time marked by sluggish economic activity and a sharp rise in prices.
"I repeat, we need to monitor it very carefully, but I do not think that we are in any way similar to the situation of 70 years. I expect that inflation is falling," he added.
The skipper of the Fed felt that the bulk of inflationary pressures was due to the rising price of energy and food.
"The current inflation is due primarily to raw material prices of oil and energy and other prices that are determined on world markets. I think that these prices should stabilize, or at least not to continue to rise at the pace that we have experienced recently, "he explained.
"If so, then inflation is expected to decline, and we should therefore be able to respond to what is both a slowdown in growth and a significant problem in the financial markets," said Bernanke .
However, he admitted that the US central bank was in a more difficult position today to respond to the economic slowdown than it was in 2001.
"At this stage, we really inflationary stronger than in 2001," said Bernanke, in response to questions after his speech.
"I think it is fair to say that both fiscal policy that monetary policy face additional constraints," he added.
The US central bank has lowered the level of its key interest rate by 2.25 percentage points since mid-September last year, to bring it back to 3%, to support a flagging economy and the threat of a recession.
The highest levels and unexpected consumer price and wholesale, however, have raised fears in some economists that the Fed goes too far to support growth, thus leading to higher inflation.
SMALL BANKS THREATENED
Bernanke reiterated Thursday, as the day before the Committee on Financial Services of the House of Representatives, that the Fed would act in an appropriate manner to prevent any further deterioration of the American economy.
"It is essential to recognize that the risks to growth are still there," he insisted.
"The Fed will continue to measure very precisely any information which would weigh on the economic outlook and act in a timely manner to support growth and provide safeguards against downside risks," he continued.
Bernanke stressed that in the case of the current downturn, it was the consumer who would bear the brunt of the impact, in particular because of the fall in residential property prices.
"In fact, the effects of the decline in the stock market have focussed on the investment," said Bernanke about the slowdown in 2001.
"In the present case, consumers bear the greatest consequences," he said.
The skipper of the Fed has held further that the decline in residential property prices were also a potential source of inflation because of their "perverse effect" that raises the price of locations, people are less inclined to buy housing and preferring to rent.
Bernanke also found that some small American banks could disappear because of the crisis, but that the banking system remained strong as a whole.
"I expect that there will be some failures," he said, alluding to the regional banks, which have invested heavily in real estate.
"Among the largest banks, solvency ratios remain good and I does not anticipate a serious problem of this kind among major banks active in international markets, which constitute a large part of our banking system," said Bernanke .
He felt that the legislature and the players in the real estate sector should go beyond temporary solutions to the crisis mortgages at risk (subprime) to find long-term solutions.
With Alister Bull, Joanne Morrison and Emily Kaiser, French and Danielle Rouquié Stanislas Dembinski
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